The Holdover Problem

If you are the owner of a GSA-leased property, you’ve probably recognized by now that there is no holdover clause in your lease. This doesn’t mean the government cannot hold over; it only means that it will pay no penalty for doing so. So it’s no surprise that GSA leases routinely lapse into holdover status.

GSA’s policy is to prevent holdover from occurring, and in recent industry presentations, it has celebrated the dwindling number of holdovers on its books. But what it doesn’t report is that most holdovers are simply replaced by short-term extensions. Holdovers and short-term extensions are functionally the same thing to most lessors, especially those who must negotiate with their lenders to extend their loans—a process that often results in the lenders scraping cash flow during the extension period. For lessors, short-term extensions are a form of financial purgatory.

Maybe we should have empathy—after all, GSA faces lots of challenges to timely execution of transactions. It needs each tenant agency to provide requirements before it can initiate the leasing process; its procurements must conform to dozens of statutes, executive orders and regulations; and, for prospectus leases, Congressional approval is required as well. So, we can forgive the federal government for the occasional holdover or short-term extension.

The problem is that GSA leases end in holdovers or short-term extensions 51% of the time. By any rational standard, that is a failure. And, from the standpoint of most lessors, it is an abuse of the government’s sovereign rights.

There are three simple solutions to this problem. The first is to start earlier. GSA’s holdovers occur not because their leasing process takes so long but because the government doesn’t start its initial spadework early enough.

The second solution is for GSA to agree to implement holdover penalties in its leases. Without any penalty for holdover (as exists in private-sector leases), GSA and its tenant agencies feel little sense of urgency to get things done. In the current process, there is no “game clock.”

Finally, GSA could mitigate this problem by enabling more frequent execution of succeeding leases. Most GSA leasing actions result in the government renewing in place. Succeeding leases allow for the government to avoid lengthy full and open competitions when it’s clear that the incumbent property is the best (and perhaps the only) option. Over the past few years, GSA has shelved succeeding lease procurements, declaring instead that it will fully compete all leases in the belief that the competitive process yields the best deals. That’s debatable, but what’s clear is that GSA cannot engage in that level of inflexibility without forcing its lessors into holdovers or short-term extensions more than half the time.

What can lessors do? If a holdover or short-term extension is going to cause you hardship, you need to engage GSA early—very early—to prod them along. This is why our brokerage team gets involved in renewals at least three years prior to expiration. GSA struggles to manage its leasing backlog under current policy, so the squeaky wheel gets the grease. Being proactive doesn’t always yield on-time execution of long-term renewals, but it’s your best hope.

The pie chart shows the percentage of federal lease holdovers and extensions for the past decade based on monthly lease inventory data provided by the GSA. We analyzed every GSA lease, 5,000 RSF and larger, that expired in the study period from September 2007 through August 2017. Of the 8,859 leases that expired in the study period, 4,489 (~51%) of these leases either went into month-to-month-holdover, or they were extended for no more than 3 years of firm (non-cancelable) term. This analysis excludes holdovers totaling three months or less.

Kurt Stout is the national leader of Colliers International’s Government Solutions practice group, which provides government real estate services to private investors and federal agencies. He also writes about federal real estate on his Capitol Markets team blog. You can contact Kurt by email or on Twitter.